Risky landing

What land issues await Chinese investors setting their sights on overseas renewable energy power plants? Huang Huina, general manager, and Yang Tong, manager, of the legal and risk management department at China Power International, offer their advice

OVER TIME, clean and renewable energy has become one of the most coveted sectors for overseas investments and acquisition by Chinese enterprises. However, overseas investment projects, especially when compared with their domestic counterparts, pose unique complexities, while power and energy investments, traditionally engineering and infrastructure projects, also face increasingly diverse risks. This article focuses on one of the core issues that tends to complicate overseas renewable energy power plant investments – that of land, as well as defence against related risks.

Obtaining land use rights

Land use and ownership is part of the basic legal system of most sovereign states. Regulations on land rights vary between countries but the core principle remains consistent. Generally, the following steps are used to obtain land use rights: affirmation of land ownership; determination of type of rights; land approval by the government; execution of an agreement; and announcement and registration.

Below, the authors break down each step in the acquisition of land rights which, depending on the legal provisions and practices specific to the host country, may require a sequence adjustment or have some procedures occur simultaneously.

1. Affirmation of land ownership. Before concerning ourselves with land use rights, we must first confirm the lawful owner who possesses the title and has the right to lease the land, or create an easement over it. Land search is the most fundamental tool for this purpose. Generally speaking, unregistered land rights are ineffective against a third party, and searching on a land registry is also a critical step in detecting any third-party rights holders.
2. Determination of the type of rights. The type of land rights for an overseas renewable energy project should be carefully planned based on the type of project and the specific facilities. Common foreign land use include lease rights, superficies, easements, and rights of way. With different types of projects, or even for different parts of the same project, one might consider more than one type of land rights application.
3. Government land approval. Governments of most countries to varying degrees require a review of the land for the construction of a project, including approval of the project land itself and its use by a foreign investor.
4. Execution of land agreement. The execution of a land agreement forms a key legal evidentiary step in successfully obtaining land use rights in most countries. Investors should pay careful attention to the regulations of different countries where they concern the substance and format of land agreements. These could include the term of agreement and the procedure involved in its execution, and its taking effect. Furthermore, if the rights are obtained from a government, one must confirm that the ex ante procedures of granting relevant land rights, including bid invitation, approval, and announcement, comply with local administrative laws.
5. Announcement of registration. Registration and the public announcement of the registration forms the last step in successfully obtaining land rights. In general, once the government has registered a land agreement and made a public announcement, it becomes effective against third parties.

Responding to land risks

Given the importance and complexity of land use rights in overseas renewable energy power projects, Chinese investors are advised to take the initiative to address, identify and control risks when locking in land use rights for their projects.

Attach importance to land issues but reasonably determine their risk level. Land is the foundation of any renewable energy power plant project. With land’s high relevance to permits, licences and project construction, any land rights issues can easily lead to a chain reaction, exposing the project to grave risks. Accordingly, land risks should never be underestimated and investors should strive to ensure all procedures are lawful and compliant, and that all rights are genuine and valid.

In reality, however, land risks are almost unavoidable, making it necessary to conduct in-depth studies of the potential consequences of any risk. To reasonably judge the level of risk and respond accordingly, investors should comprehensively consider potential risk mitigation measures, project expectations, and the company’s risk appetite.

Due diligence. When developing projects overseas, one must understand that not even the most experienced investor can be fully aware of all the legal requirements in every country and region. This is because policies, laws and market practices are dynamic, constantly morphing and evolving. Accordingly, investors must put themselves at the legal frontline of the host country or region, or rely on the support of local expertise to access the latest first-hand information.

Furthermore, the depth and breadth of due diligence should be consistent with the type and circumstances of the project. For example, the requirements, risk points and response measures for obtaining land use rights in a greenfield project where the counterparty and land provider is the government could differ substantially with those in a development rights acquisition project facing a private seller.

In some countries, the law permits unregistered third parties to assert rights over land under certain circumstances, including but not limited to succession and communal holdings. In these cases, the third-party rights are not registered, and a determination of those rights cannot be made through a customary land registry search. In fact, it may be the case that there are several unregistered previous owners who have a stake in the land.

If it is discovered through due diligence that the transferor’s ownership of the land has been acquired through a transfer from a previous owner, it will be necessary to take advice from local experts and determine the best course of action, taking into account the specifics of the project and the importance of the lot.